Sarbanes-Oxley Act
Introduction
Sarbanes-Oxley Act of the year 2002 was enacted on 30th July 2002. The other name of the act is the Public Company Accounting reform and the investor Protection Act in the house of the senate and the accountability and the Responsibility Act in the house or the Sarbanes-Oxley as It’s popularly known. It’s a federal law that was enacted to enhance the United States boards or the management of public companies and the public accounting companies or firms. The Sarbanes-Oxley Act came into being or was enacted as a result of reaction to major scandals in accounting and corporate world in the U.S. PCAOB (Public Company Accounting Oversight Board) was created and charged with the responsibility of overseeing, disciplining, and regulating accounting firms and inspecting them. The Sarbanes-Oxley also covers corporate governance, financial disclosures, and internal control systems.
Evaluate the effectiveness of regulations such as Sarbanes-Oxley Act over minimizing the corporate fraud and protecting investors and make (1) suggestion for improvement.
Congress discussed and passed the Sarbanes-Oxley Act as a result of the scandals that hit the country in the corporate sector. This Act was meant to stream line and regulates the management of accounting firms in the US. The Act strengthens the corporate and management governance in the public and private sector by increasing transparency in financial accounting and auditing. The Act attempted to control the activities of major accounting firms and the boards of public companies by creating the PCAOB to set the overall auditing standards. A new and strict definition of the independence of the auditor general was implemented. The criminal penalties for fraudulent activities were intensified under the act and the time frame for financial information disclosures and their content also came under the strict scrutiny of the act.
The Sarbanes-Oxley act (SOX) has over the year’s motivated and encouraged public companies to go private in a way to cut down high costs related to the compliance of the SOX Act (Hartman, 2005) Some multi-national companies have opted to stay clear of the US market in order to avoid the effects of the SOX act. (Kuschnik, 2008)
Section 404 of the Sarbanes-Oxley Act makes it mandatory for all companies to include in their annual reports the internal control reports which must include the management responsibility statement for the establishment and maintenance of adequate and essential internal control measures, structures and procedures in its financial reporting standards. The assessment of the structure and procedures of its internal control system. The auditors are also required by the act to comment on the effectiveness of the internal control system. Compliance to this section of the act increases the responsibilities of the auditors which eventually add additional costs on the normal audit fees. (Kimmel, Paul, Weygandt, Jerry, Kieso, Donald, 2011).
The major improvement of the Sarbanes-Oxley Act should center on minimization of the overall costs requirements for the full implementation of the act and its impact on small and middle tier accounting firms which also contribute to the auditing profession standards in the US. (Sissell, 2006) The government should find a way of leveling the play field for both the big and small players in the auditing profession to encourage also the growth of the small sectors of auditing profession. Some firms actually withdrew from the US market in order to avoid the provisions of the Sarbanes-Oxley act. (Beckstead, 2006)
Given the oversight of the accounting profession by the PCAOB as a result of the Sarbanes-Oxley Act, assess the impact on auditing firms and the public accounting professions.
PCAOB (Public Company Accounting Oversight Board) was created and charged with the responsibility of overseeing, disciplining, and regulating accounting firms and also inspecting them. The Sarbanes-Oxley essentially covers the corporate governance, financial disclosures, and internal control systems. The largest audit firms position themselves to serving their clients efficiently by investing heavily in information technology, training and in other facilities that are far beyond the reach of the small independent audit firms. These investments which are implemented by the large firms make it economically impossible for the small clients to afford their services which are comparably more costly hence the big 4 audit firms continue to exploit the market for large corporate companies.
The different and initial demand elasticity for the buying clients increases the power and market of the central tier auditor groupings in line with the SOX implementation. As in the case of differentiated product market, most consumers have a higher relative quality and cost the product have an initial increased inelastic demand and the willingness to pay higher prices. Studies have shown that several small and middle tier auditing firms have left the market in an effort to avoid the requisite costs of registration with the PCAOB, which has possibly decreased the competition for middle and small audit firms hence raisin their costs. (Asthana, Balsam and Kim, 2004) Some policies of PCAOB like the one-size-fits-all the rules basically creates a stumbling block for the small audit firms (Beckstead, 2006) While the big four auditing firms worldwide control majority of the auditing jobs in the US, more than 1600 audit firms have registered with the PCAOB since the year 2006, meaning that there is still enough market for small audit firms among the small clients. (Beckstead, 2006)
Offer your opinion as to whether or not you believe the accounting profession is better off being self or
government regulated with regard to a firm’s ability to detect and report corporate fraud.
The accounting profession is better regulated by the government instead of self regulation. In a liberalized market it was prudent that the accounting profession regulates itself. But with scandals that have almost brought disrepute to the accounting profession, I would strongly recommend that the accounting profession be brought under the strict and direct scrutiny of the governments oversight authorities like the PCAOB. These would protect the rights of the public and also prevent the abuse of the public’s right to fair disclosures and accountability by the auditors.
Predict whether or not corporate fraud will be reduced, increase, or remain the same based on requirements for audits of publicly traded companies as prescribed in the Sarbanes-Oxley Act. Support your position.
Corporate fraud will definitely reduce following the enactment and the consequent implementation of the provisions of the Sarbanes-Oxley Act of the year 2002. The act has eleven sections which deal with all aspects of the accounting profession. The Act also provides protection for the whistle blowers who disclose fraudulent activities in any corporation. This provision encourages accountability and integrity in matters relating to the management of the state enterprises and large corporations. The act also prescribes for stiffer and more intensified punishment for convicted offenders of the act to discourage prospective offenders in future. The act also brings on board a lot of accountability in the accounting profession relating to the auditing of public and private companies.
References
Kimmel, PhD, CPA, Paul D.,Weygandt, PhD, CPA, Jerry J., Kieso, PhD, CPA, Donald E. (2011). Financial Accounting, 6th Edition. Wiley
Kuschnik, B. (2008) The Sarbanes Oxley Act: “Big Brother is watching” you or Adequate Measures of Corporate Governance Regulation? 5 Rutgers Business Law Journals.
Sissell, K. (2006) Committee to Recommend Changes to Sarbanes-Oxley Act. Chemical
Week 68, 31:
Hartman, T. (2005) The cost of being public in the era of Sarbanes-Oxley. Foley and Lardner
Presentation. June 2005. Hay, D.C., W
Beckstead, B. (2006) Sarbanes-Oxley
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